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Qualifying for a loan is about to become harder

This means that for the first time, credit providers will have access to credit account history - the applicant’s credit account status and their 24 month repayment history.

Comprehensive credit reporting will make a loan qualification harder for every Australian who applies for consumer credit - a home loan or credit card or store card or car finance or a personal loan or a mobile phone plan or an electricity/utilities account.[1]

The current credit reporting regime

For over 40 years, credit reporting agencies in Australia (credit bureau) have collected consumer and business credit risk information in credit files. Apart from identification and contact details, credit files currently contain mainly negative information (defaults).

What is a credit report? A credit report contains information from the individual’s credit file and often an analysis - a credit score.

What is a credit score? Veda, the leading credit bureau in Australia, calls it a VedaScore – ‘It is a score out of 1,200, calculated using more than 90 variables about an individual’s identity and financial history.’[2] A credit score is used to predict credit defaults. In the US it is called the FICO score.

The requirement that credit licensees follow responsible lending practices, by making thorough background checks when assessing credit risk, was introduced under the National Consumer Credit Protection Act 2009 (Cth).

This gave impetus to the Australian Government to remove its ban on recording credit history, which had been in place since the Privacy Amendment Act 1990 (Cth). It accepted that adding positive information to a credit file would improve lending practices, and as a political trade-off, enhanced the privacy protections for credit consumers.

As from 12 March 2014, the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) will allow credit providers and credit reporting bodies to collect, share and use 5 new data fields for credit accounts –

the type of credit account opened

the name of the credit provider and whether they are a credit licensee

the dates on which the credit account was opened and closed

the current limit of the credit account (if open)

a 24 month repayment history information starting December 2012 – that is, the due date for payment, whether a payment has been made on time, and if the due date was missed, when the payment was made. [3]

Note - The Privacy Actdoes not allow the payment amounts or the account balance to be recorded.

Who will have access to these new data fields? Mobile phone, electricity and gas companies and other credit providers will have access restricted to the account status fields, because access to the repayment history data field is restricted to credit licensees.

The transition to comprehensive credit reporting is expected to take until 2015 to be completed.

Privacy Protection enhancements

This is a summary of what information the Privacy Act[5] and the new Credit Reporting Code of Conduct, will allow to be recorded and to be kept on individual credit files as from 12 March 2014 [6]

Details of credit enquiries made and credit refusals to be kept for 5 years

Summonses and court writs to be kept for 4 years

Court judgments to be kept for 5 years

Credit defaults of $150 or more (recorded if at least 60 days overdue) to be kept for 5 years

Bankruptcy orders / debt agreements made, serious defaults and clearouts to be kept for 7 years

Account status and repayment history to be kept for 24 months

Company directorships, past and present to be kept indefinitely

The privacy protection enhancements consist of -

At least two notifications (by telephone call or letter) are to be given before listing a default

Credit consumers may make ‘do it yourself’ credit rating repairs in this way – they obtain their personal credit file, and if they find any errors, notify the credit reporting agency; and if not satisfactorily resolved, apply to an external dispute resolution scheme / Financial Ombudsman or the Australian Information Commissioner to correct the information [7]

A 30 day time limit applies (after a request is made) for credit reporting agencies to correct information on the file that is inaccurate, out-of-date or incomplete, or to substantiate the correctness of the information

Credit providers can be prosecuted and consumers can be compensated if the Privacy Law / Credit Reporting Code is contravened

Consumers may request their credit information be frozen if they are at risk of identity fraud

Who can access credit files? Access to credit files is mainly restricted to credit providers, mortgage and trade insurers and to individuals under the Privacy Act. Banks and financial institutions are classified as credit providers, but so are mobile phone, electricity and gas utilities and business which provide payment terms of at least 7 days for the purchase of goods and services. Credit providers may give limited information to debt collectors to follow up defaulters.

Real estate agents, debt collectors, employers and general insurers are barred from access to credit files (unlike in the US).

Veda expects the introduction of Comprehensive Reporting in Australia (will) improve the ability of credit providers to assess the credit risk of consumers and to either grow loan volumes or reduce risk of bad debt expense. [8] (Veda’s) pilot program (found) that the credit history will drive up to 40% improvement in credit bureau scores predictive accuracy.[9]

Dun & Bradstreet: For Australia’s consumers, the new data will present a fairer picture of creditworthiness.[10] This will start to look similar to the systems in place in the US, UK and Canadian models (where) good credit behaviour is rewarded in the same manner that bad behaviour is penalised.[11]

The Australian Bankers’ Association: Comprehensive credit reporting now brings Australia into line with other G20 countries which already have CCR in place.[12]

How will comprehensive credit reporting affect borrowers?

As a result of comprehensive credit reporting, the current emphasis on proof of income will be balanced by repayment history information when it comes to credit assessment.

Loan qualification will prove harder for some borrowers.

Borrowers with a good credit history (with repayments made on time) can expect lower interest rates and better credit offers.

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